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Professional Poker Player Goes Bust in Tax Court

A
professional poker player who was also a civil and
geotechnical engineer and a laundromat owner lost in Tax Court
on Monday (Hom, T.C. Memo. 2013-163). The court held
that John Hom received unreported wages from his wholly owned
C corporation, could not deduct unsubstantiated gambling
losses or travel expenses, and failed to establish he was
entitled to additional losses from his laundromat business.

Hom, who for the years at issue did not file returns for
himself or his corporation until after the IRS prepared
substitutes for returns for him, had made large withdrawals
from his corporation’s bank account for each year at issue
(2005–2008). The IRS used these withdrawals to recreate his
wage income for those years. Hom, however, argued that the
withdrawals were repayments on a loan he made to the
corporation, rather than wages for engineering services he
performed as an officer and employee of the corporation. The
Tax Court, however, noted that there was no evidence of a loan
and that there was evidence that the payments were for
services rendered to the corporation.

Hom was no
luckier when it came to the additional gambling losses he
tried to claim to offset his significant amounts of income
from playing poker online and in casinos. The parties
stipulated that Hom was in the trade or business of gambling
during the years at issue, which permitted him to deduct his
gambling losses to the extent of his gambling gains.

Thus the Tax Court allowed Hom a deduction for gambling
losses for 2005 that he was able to substantiate, but did not
allow him a deduction for additional gambling losses he
claimed for other years because, for 2006, he had no gambling
gains to offset the losses and, for 2007 and 2008, he did not
present evidence sufficient for the court to estimate his
losses.

The court also rejected his attempt to deduct
his travel and lodging expenses for trips to casinos because
he did not meet the heightened substantiation requirements to
deduct these expenses under Sec. 274(d). However, it did
permit him to deduct $595, $20, $160, and $40 of tournament
entry fees for 2005 through 2008.

As for the
laundromat, the IRS permitted deductions for a smaller amount
of expenses than that claimed by Hom on his returns for 2007
and 2008. On this issue as well, the Tax Court upheld the
IRS’s determination because the evidence Hom presented was not
sufficient to support the increased deduction.

He also
argued he was not liable for the negligence penalty imposed by
the IRS, but the court upheld it, pointing to Hom’s failure to
maintain records, having unreported income, and having
unsubstantiated loss and expense deductions.

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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